Now I didn't call myself the expert, but I recently finished a month as a guest "Ask the Expert" for New Hampshire's Amoskeag Business Incubator’s “Ask the Expert” series.
First, I wrote an article about venture capital called "The Venture Caital Process: Pizza and Nanotech?" Then, a series of questions were submitted to me online during the month of October 2008. I thought I'd post the questions and answers below.
Question: I have read many different opinions from VCs and entrepreneurs regarding the importance of IP to a startup. I was curious what your opinion on the subject is. When you are looking at a startup for potential funding, do you have the expectation that at some point in the future that business will be issued patents? If so, is the future possession of IP a make or break deal? Clearly the importance of IP differs in different industries, but I wonder if you could still speak to the broad importance.
Answer: The importance of IP is business-dependent. The key question you are asking is about barriers to entry -- why will your team, technology and strategy win? As investors, can we become convinced of that?. When we look at a startup, we look at a variety of issues, including team, market, competition, IP and legal, among others. Team is by far the most important -- we, more than anything else, invest in people. Technology will change but we do not feel that we can so easily change people. But that said, IP -- or barriers to entry -- are important. We've invested in companies where patents were not yet issued, but we knew that we had a clear path towards patents and securing IP or another key market barrier for competitors existed. Without patents, the entrepreneur needs to provide other compelling barrier aspects to us such as the ability to build a strong customer base, with those customers becoming so entrenched with your product that you become "sticky" and extremely difficult to replace, etc... In the end, we need to know that you have the team, strategy and technology to win, so they are really all intertwined. But if the market is one such that the barrier to entry and customer switching costs are light without IP, then patents become more important and the lack of a clear path towards securing IP can actually break a deal.
- - - - - - -
Question: What is the difference in the range of funds that an angel investor would invest in a business versus a venture capital firm?
Answer: I assume by this question you mean the amount of funds an angel investor would invest in a business vs. a venture capital investor - although you also might be asking how the range of businesses in which each invest might differ. As for amount of funds, angel investors (as individuals) typically invest anywhere from $15,000 to $500,000, with the average I've seen in New England typically in the $25,000-35,000 range. Obviously you would like angel investors with deeper pockets. When angels act as a group, the amounts can go from $50,000 to $500,000 - but getting "groups" to act and invest like "groups" is not as easy as it might seem. At the heart, angels are still individuals and decisions are made at the individual level. The most important thing you need to look at with venture funds as it relates to the amount they may invest is to look at the size of the fund. Take the size of the fund and divide it by 15 - that should get you somewhere around the "average" amount a fund might invest, over subsequent rounds, in any one business. Take it up/down by 25% to better see the range. So the size of the fund matters greatly for what a fund might invest. As to industry differences, venture investors won't touch real estate and tend to shy away from retail - anything with gross margins under 40-50% are virtually non-starters for a venture investor. While most angel investors also will stay away from such sectors, some may be willing to touch those areas if they have experience. Business model, margin, team and scalability matter most: you need sustainable gross margins in the 50%+ range, you need to be able to scale (make once, sell many times) and the team needs to be stellar.
- - - - - - -
Question: If a firm is successful in obtaining venture capital funds, can you tell me how long the process typically takes from a first initial meeting to actually obtaining the funds?
Answer: With almost everything in life, there is no "typical" answer. We once did a deal from first meeting to close in six weeks and I never hope to repeat that again (and the opportunity was extraordinary and the timing paramount). For the other deals we have done, timing from first meeting to close has ranged from six months to two years. For a six-month close though, that meant that a term sheet was issued three months after the first meeting. When a company needs money, they should plan on anywhere from a six- to 12-month funding cycle.
- - - - - - -
Question: I have never hit a point where I couldn't figure out my next step but I have reached this with a product I represent. The product is designed to plug a whole in a company's endpoint security that is often over looked. In a times when companies are downsizing creates the environment where protecting a company's information is the greatest. Visibility I believe is my greatest problem. How does a business incubator evaluate a product to determine the level of advertising investment needed to get a product off the ground?
Answer: It's near impossible to get to a right answer on this type of question.There's no particular metric or study that I'm aware of that points to a given return for a given level of spend in advertising. So, I wouldn't spend too much time looking for a reference point there for a couple reasons:Few private/angel/venture investors believe that any sort of broad-based advertising campaign is the right strategy to launch a new product, for a couple of reasons: 1) wrong tool -- to make a meaningful impact nationally, you'd need to spend far more money than investors will give you; given that advertising is hit or miss, major media campaigns not the best place to spend money, even if you could find the money to support it; 2) investors would prefer to see you test much more capital efficient methods of promotion -- e.g. narrow-casting your message to a discrete audience using less expensive forms of media (e.g. select a particular sector you think would respond to this product -- e.g. financial services, insurance--then do a discrete test to a sample of that industry by renting an email or snail mail list and send and email promotion or inexpensive print promotion (a small 3x5 post card) to trial the product. If you get some traction then you can show your results to an investor that might be open to funding the next stage of growth. PR is also a relatively inexpensive means of reaching audience. Write articles on your topic and see if you can get them printed by trade publications. Offer yourself as a speaker at relevant conferences. Use inexpensive means. But do NOT think about traditional media advertising as the way to get known. Better yet, hire or bring on your board someone with marketing expertise in this field.
0 comments:
Post a Comment